CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
2ND SEMESTER - REVIEWER
PAS 2: INVENTORIES
INVENTORIES
Inventories are assets held for sale in the ordinary
course of business, in the process of production for
such sale or in the form of materials or supplies to be
consumed in the production process or in the rendering
of services.
What are the components of cost of inventories?
• cost of purchase,
• cost of conversion, and
• other cost incurred in bringing the inventories
to their present location and condition.
Explain cost of purchase, cost of conversion and
other cost included in cost of inventories.
The cost of purchase of inventories comprises the
purchase price, import duties and irrecoverable taxes,
freight, handling, and other costs directly attributable
to the acquisition of finished goods, materials, and
services. Trade discounts, rebates and other similar
items are deducted in determining the cost of purchase.
Cost of conversion of inventories includes cost directly
related to the units of production such as direct
labor. It also includes systematic allocation of fixed
and variable production overhead that is incurred in
converting materials into finished goods. Other cost
included in the cost of inventories only to the extent that it
is incurred bringing the inventories to their present
location and condition.
Identify certain costs that are excluded from the
cost of inventories.
The following costs are excluded from the cost of
inventories and recognized as expenses in the period
when incurred:
• Abnormal amounts of wasted materials, labor,
and other productions costs.
• Storage costs, unless necessary in the
production process prior to a further production
stage.
• Administrative overheads
• Distribution or selling costs.
Explain the cost of inventories of a service provider
Cost of inventories of a service provider consists
primarily of the labor and other costs of personnel
directly engaged in providing the service, including
supervisory personnel and attributable overhead.
Explain the cost formulas in determining cost of
inventories.
PAS 2, paragraph 25, expressly provides that the cost
of inventories shall be determined by using either;
a) First in, first out (FIFO) method - assumes
that “The goods first purchased are first sold” and
consequently, the goods remaining in the
inventory at the end of the period is those
most recently purchased or produced. In
other words, the FIFO is in accordance with
the ordinary merchandising procedure that the
goods are sold in the order they are
purchased. The rules are “first come, first sold.”
b) Weighted average - the cost of the beginning
inventory plus the total cost of purchases
during the period is divided by the total units
purchased plus those in the beginning
inventory to get a weighted average unit cost.
Such weighted average unit cost is then
multiplied by the units on hand to derive the
inventory value. In other words, the average
unit cost is computed by dividing the total cost
of goods available for sale by the total number
of units available for sale.
Explain the specific identification of determining
cost of inventories
Specific identification means that specific costs are
attributed to identified items of inventory. The cost of
inventory is determined by simply multiplying the units
on hand by the actual unit cost. PAS 2, paragraph
23, provides that this method is appropriate for
inventories that are segregated for a specific project
and inventories that are not ordinarily interchangeable.
What is the standard in measuring inventory in the
statement of financial position?
PAS 2, paragraph 9, provides that inventories shall
be measured at the lower of cost and net realizable
value. The cost of inventory is determined using
either FIFO cost or average cost. The measurement of
inventory at the lower of cost and net realizable value
is known as LCNRV.
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
2ND SEMESTER - REVIEWER
Explain net realizable value.
Net realizable value or NRV is the estimated selling
price in the ordinary course of business less the estimated
cost of completion and the estimated cost of disposal.
Explain the accounting for inventory write-down.
Accounting for inventory write-down states that if the cost
is lower than net realizable value, there is no accounting
problem because the inventory is stated at cost and the
increase in value is not recognized. And if the net
realizable value is lower than cost, the inventory is
measured at net realizable value. In this case, the
problem is the proper treatment of the write-down of the
inventory to the net realizable value. The write-down of
inventory to net realizable value is accounted for using the
allowance method
PAS 41; AGRICULTURE
Define biological assets, agricultural produce, and
harvest.
Biological assets are living animals and living plants.
Agricultural produce is the harvested product of the
entity’s biological assets. Harvest is the detachment
of produce from a biological asset or the cessation
of a biological asset’s life processes. Examples of
biological assets, agricultural produce, and products
that are the result of processing after harvest;
• sheep to wool to yarn or carpets;
• dairy cattle to milk to cheese;
• bushes to leaf to tea or cured tobacco;
• fruit trees to picked fruit to processed fruit.
What is an agricultural activity?
Agricultural activity is the management by an entity
of the biological transformation and harvest of
biological assets for sale, or for conversion into
agricultural produce, or into additional biological assets.
Explain biological transformation.
Biological transformation comprises the processes of
growth, degeneration, production, and procreation that
cause qualitative or quantitative changes in a biological
asset.
Explain the recognition of biological asset and
agricultural produce.
An entity should recognize a biological asset or
agriculture produce when, and only when: the entity
controls the asset as a result of past events; it is probable
that future economic benefits will flow to the entity; and
the fair value or cost of the asset can be measured
reliably.
Explain the initial measurement of biological asset.
Biological assets should be measured on initial
recognition and at subsequent reporting dates at fair
value less costs to sell, unless fair value cannot be
reliably measured.
Explain the measurement of agricultural produce
as it grows and once harvested.
Agricultural produce should be measured at fair
value less costs to sell at the point of harvest. Because
harvested produce is a marketable commodity, there is
no 'measurement reliability' exception for produce. A
gain on initial recognition of agricultural produce at fair
value should be included in profit or loss for the
period in which it arises. All costs related to biological
assets that are measured at fair value are recognized as
expenses when incurred, other than costs to
purchase biological assets.
Define bearer plant.
Bearer plant is a living plant that:-Is used in the
production or supply of agricultural produce-Is
expected to bear produce for more than one period,
and -Has a remote likelihood of being sold as agricultural
produce, except for incidental scrap sales.
Explain the treatment of bearer plant.
If an entity grows plants both to bear produce and for sale
as living plants or agricultural produce, apart from
incidental scrap sales, it must continue to account
for those plants at fair value less costs to sell in their
entirety (for example, trees that are cultivated for their
lumber as well as their fruit).Before bearer plants are
placed into production (i.e. before they reach maturity
and bear fruit) they should be measured at
accumulated cost.
Explain the treatment of bearer animals.
The bearer plants as property, plant and equipment
(PPE) per IAS16 allows the preparer to value the
bearer plants at cost, less subsequent depreciation, or
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
2ND SEMESTER - REVIEWER
impairment or at a revalued amount. No additional
disclosure requirements were added specifically for
bearer plants. In general, the bearer plants do not
generate cash flows independently of the land, and
may therefore be seen together with the land as a
cash-generating unit. The impairment test would then
also take place at the level of the cash-generating
unit (thus bearer plants and land it is situated on).
Explain the treatment of animal-related recreational
activities.
Animals related to recreational activities shall be
accounted for in accordance with PAS16, PPE,
because any recreational activities are not an
agricultural activity.
PAS 36; IMPAIRMENT OF ASSET
Define impairment asset.
An impaired asset is an asset that has a market
value less than the value listed on the company's
balance sheet. When an asset is deemed to be
impaired, it will need to be written down on the
company's balance sheet to its current market value.
What are the internal sources of information that
would indicate possible impairment?
The internal information that should be considered
which may indicate impairment include:
• Evidence of obsolescence or physical
damage
• Changes to the asset’s use, including
• Asset becoming idle
• Plan to discontinue or restructure the
operation to which the asset belongs
• Plan to dispose of the asset before previously
expected date
• Reassessing the useful life as finite rather
than infinite
• Poor performance
What are the external sources of information that
would indicate possible impairment?
The external information that should be considered
which may indicate impairment include:
• Decline in asset value: more so than normal
wear and tear
• Changes in the entity’s environment;
technological, market, economic or legal
conditions.
• Increase in market interest rate, this will affect the
asset’s value in use.
• Carrying amount of net assets: If this is greater
than the market capital of a company, there
may be impairment
What is the recoverable amount of an asset?
Recoverable amount is the greater of an asset's
fair value less costs to sell, or its value in use. Thus, the
concept essentially focuses on the greatest value that
can be obtained from an asset, either by selling or using
it.
Explain fair value less cost of disposal.
Fair value less costs to sell (FVLCS) is the
amount obtainable from the sale of the asset in an
arm’s length transaction between knowledgeable and
willing parties, less the costs of disposal. This term
is consistent with the measurement basis in IFRS 5
Non-current Assets Held for Sale and
Discontinued Operations.
Explain value in use.
Value-in-use is the net present value of the cash flows
generated by an asset as it is currently being used
by the owner. This amount may be less than the
net present value of cash flows from the highest and best
use to which an asset can be put.
Explain the reversal of an impairment loss.
Reversal of an impairment loss on CGU is
allocated to individual assets on a pro-rata basis, but
the increased carrying amount cannot be higher than
the carrying amount that would have been determined
(net of depreciation) without impairment loss in
previous years.
What is the meaning of cash generating unit?
A cash-generating unit is the smallest identifiable
group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets
or groups of assets
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
2ND SEMESTER - REVIEWER
Explain the allocation of impairment loss across the
assets of a cash generating unit.
An impairment loss is recognized for a cash-
generating unit where the recoverable amount of
the unit is less than the carrying amount of the unit.
The impairment loss is allocated to reduce the carrying
amount of the assets of the unit on a pro rata basis,
based on the carrying amount of each asset in the
unit.
Explain impairment of a cash generating unit with goodwill.
A cash-generating unit to which goodwill has been allocated
shall be tested for impairment at least annually by
comparing the carrying amount of the unit, including the
goodwill, with the recoverable amount of the unit:
• If the recoverable amount of the unit exceeds the
carrying amount of the unit, the unit and the
goodwill allocated to that unit is not impaired
• If the carrying amount of the unit exceeds the
recoverable amount of the unit, the entity must
recognize an impairment loss.
PAS 20: GOVERNMENT GRANT
Define a government grant.
It is an assistance to government in the form of transfer
of resources to an entity in return for part or future
compliance with certain conditions relating to
operating activities of the entity.
Explain the recognition and measurement of
government grant.
Government grant shall be recognized when there is
reasonable assurance that: a. the entity will comply
with the conditions attaching to the grant. b. the grant
will be received. Government grant shall not be
recognized on a cash basis as this is not consistent with
generally accepted accounting practice.
Explain accounting for grant in recognition of
expenses.
Government grants are recognized in profit or loss on a
systematic basis over the periods in which the entity
recognizes expenses for the related costs for which
the grants are intended to compensate, which in the
case of grants related to assets requires setting up
the grant as deferred income or deducting it from the
carrying amount of the asset.
Explain accounting for grant related to depreciable
asset.
Grant related to depreciable asset shall be recognized
as income over the periods and in proportion to
the depreciation of the related asset.
Explain accounting for grant related to
non-depreciable asset requiring fulfillment of
certain conditions.
Grant related to non-depreciable asset requiring
fulfillment of certain conditions shall be recognized
as income over the periods which bear the cost of
meeting the conditions.
Explain accounting for grant received as
compensation for expenses or losses already
incurred.
A government grant that becomes receivable as
compensation for expenses or losses already incurred
or for the purpose of giving immediate financial
support to the entity with no further related costs shall
be recognized as income of the period in which it
becomes receivable.
Explain the presentation of government grant
related to asset.
It shall be presented in the statement of financial
position in either of two ways:
a. By setting the grant as deferred income.
b. BY deducting the grant in arriving at the carrying
amount of the asset
Explain the presentation of government grant
related to income.
Shall be presented as follows:
• the grant is presented in the income statement,
either separately or under the general heading
“other income”.
• Alternatively, the grant is deducted from the
related expense.
Define government assistance.
It is the action by government designed to provide an
economic benefit specific to an entity or range of
entities qualifying under certain criteria.
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
2ND SEMESTER - REVIEWER

What are the necessary disclosures related to Explain the capitalization of borrowing cost for
government grant? asset financed by general borrowing.

• The accounting policy adopted for government
grant including the method of presentation
adopted in the financial statements.
• The nature and extent of government grant
recognized in the financial statements and
an indication of other forms of government
assistance from which the entity has directly
benefited.
• Unfulfilled conditions and other contingencies
attaching to government assistance that has
been recognized.
If the funds are borrowed generally and used for
acquiring a qualifying asset, the amount of
capitalizable borrowing cost is equal to the average
carrying amount of the asset during the period
multiplied by a capitalization rate or average interest rate.
Explain the capitalization of borrowing cost for
asset financed by both specific and general
borrowing.
Explain commencement of capitalization of
borrowing cost.

The capitalization starts when all three conditions are

PAS 23: BORROWING COST
met: expenditures are incurred, borrowing costs are
incurred, and the activities necessary to prepare
the asset for its intended use or sale are in progress.
Define borrowing costs.
Expenditures on the asset are incurred when the
prepayments are made (payments of the instalments).
It is defined as interest and other costs that an entity
incurs in connections with borrowing of funds.
Explain suspension of capitalization of borrowing
cost.
What is a qualifying asset for purposes of
capitalization of borrowing cost? An asset that
an entity may incur borrowing costs during extended
necessarily takes a substantial period of time to get
periods in which it suspends the activities necessary to
ready for the intended use or sale. Examples includes
prepare the asset for its intended use or sale, and that
the ff:
such costs are costs of holding partially completed assets
o manufacturing plant
and do not qualify forcapitalization.
o Power generation facility
o intangible asset
Explain cessation of capitalization of borrowing
o Investment property.
cost.
Explain the accounting for borrowing cost.
Capitalization of borrowing cost ceases when all the
activities necessary to prepare the qualifying assets
It can be capitalized when the asset is a qualifying
are complete. If an asset has been completed in parts
asset, and it is probable that the borrowing cost will result
and a completed part is capable of being used while
to future economic benefit and the cost can be
the construction for the other part continues, then
measured reliably. All the borrowing cost shall be
the capitalization for that completed part will cease.
expensed as incurred.
What are the necessary disclosures related to
Explain the capitalization of borrowing cost of asset
borrowing cost?
financed by specific borrowing.
The standard requires the entity to disclose the following:
If the funds are borrowed specifically for the purpose
Borrowing cost capitalized during the accounting period;
of acquiring a qualifying asset, the amount of
The weighted average borrowing cost rate or percentage
capitalizable borrowing cost is actual borrowing cost
used to determine the borrowing costs eligible for
incurred during the period less any investment income
capitalization.
from the temporary investment of those borrowings.
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
2ND SEMESTER - REVIEWER

PAS 16: PROPERTY, PLANT, EQUIPMENT o the location and condition necessary for it to
be capable of operating in the manner
intended by management.
Define property, plant, and equipment.
o Initial estimate of the cost of dismantling and
removing the item and restoring the site on
Property, plant and equipment are tangible assets that
which it is located for which an entity has a
are held for use in production or supply of goods or
present obligation.
services, for rental to others, or for administrative
purposes, and are expected to be used during more
Explain directly attributable costs.
than one period.
Cost of employee benefit arising directly from the
What are the major characteristics in defining
construction or acquisition of the item of property, plant,
property, plant, and equipment?
and equipment.
o Cost of site preparation
Accordingly, the major characteristics in the definition
o Initial delivery and handling cost
of property, plant and equipment are: a. The property,
o Installation and assembly cost
plant and equipment are tangible assets, meaning
o Professional fee
with physical substance. The property, plant and
o Costs of testing whether the asset is functioning
equipment are used in business, meaning used in
properly.
production or supply of goods or services, for rental
purposes and for administrative purposes. The
Give examples of costs which are expensed rather
property, plant and equipment are expected to be used
than capitalized as property, plant, and equipment.
over a period of more than one year.
Examples of cost that are expensed rather than
Give examples of property, plant, and equipment.
recognized as element of cost of property, plant and
equipment are:
Land, land improvements, building, machinery, ship,
o Cost of opening a new facility
aircraft, motor vehicle, furniture and fixtures, office
o Cost of introducing a new product or service,
equipment and tools are examples of property, plant,
including cost of advertising and promotion
and equipment.
o Cost of conducting business in a new location or
with a new class of customer, including cost of
Explain the recognition of property, plant, and
staff training
equipment.
o Administration and other general overhead cost
Initial operating loss
An item of property, plant and equipment shall be
recognized as asset when; it is probable that future
What is the cost of the asset acquired on a cash
economic benefits associated with the asset will flow to
basis?
the entity the cost of the asset can be measured reliably.
The cost of an item of property, plant and equipment is
Explain the measurement of property, plant and
the cash price equivalent at the recognition date. The cost
equipment at recognition and after recognition.
of asset acquired on a cash basis simply includes the
cash paid plus directly attributable costs such as freight,
An item of property, plant and equipment that qualifies
installation cost and other cost necessary in bringing the
for recognition as an asset shall be measured at cost.
asset to the location and condition for the intended use.
Cost is the amount of cash or cash equivalent paid and
the fair value of the other consideration given to
What is the cost of an asset acquired on account
acquire an asset at the time of acquisition or construction.
subject to a cash discount?
What are the elements of cost of property, plant
When an asset is acquired on account subject to a cash
and equipment?
discount, the cost of the asset is equal to the invoice price
minus the discount, regardless of whether the discount is
The cost of an item of property, plant and equipment
taken or not. Cash discounts are generally considered as
comprises:
reduction of cost and not as income.
o Purchase price, including import duties and
nonrefundable purchase taxes, after deducting
trade discounts and rebates.
o Cost directly attributable to bringing the asset to
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
2ND SEMESTER - REVIEWER
If an asset is acquired on the installment basis, the
asset is recorded at what amount?
When payment for item of property, plant and equipment
is deferred beyond normal credit terms, the cost is the
cash price equivalent. In other words, if an asset is offered
at a cash price and at an installment price, the asset shall
be recorded at the cash price. The excess of the
installment price over the cash price is treated as an
interest to be amortized over the credit period.
Discuss the accounting procedure when an asset is
acquired through the issuance of share capital.
Philippine GAAP provides that if shares are issued for
consideration other than actual cash, the proceeds shall
be measured by the fair value of the consideration is
received. Accordingly, where a property is acquired
through the issuance of share capital, the property shall
be measured at an amount equal to the following in the
order of priority:
• Fair value of the property received
• Fair value of the share capital
• Fair value or stated value of the share capital
Discuss the accounting procedure when an asset is
acquired by issuing bonds payable.
PFRS 9, paragraph 5.1.1, provides the asset acquired by
issuing bonds payables measured in the following order:
• Fair value of bonds payable
• Fair value of asset received
• Face amount of bonds payable
Discuss the accounting procedure for recording an
exchange.
PAS 16, paragraph 24, provides that the cost of an item
of property, plant and equipment acquired in exchange for
a non-monetary asset, or a combination of monetary and
non-monetary asset is measured at fair value plus any
cash payment. However, the exchange is recognized at
carrying amount if the exchange transaction lacks
commercial substance.
What would the cost of self-constructed property,
plant and equipment include?
The cost of self-constructed property, plant and
equipment includes: direct cost of materials direct cost of
labor indirect cost and incremental overhead specifically
identifiable or traceable to the construction.
Explain derecognition of property, plant and
equipment.
Derecognition means that the cost of property,
plant and equipment together with the related
accumulated depreciation shall be removed from the
statement of financial position. PAS 16, paragraph 67,
provides that the carrying amount of an item of property,
plant, and equipment shall be derecognized on disposal
or when no future economic benefits are expected
from the use or disposal.
Explain the treatment of fully depreciated
property.
A property is said to be fully depreciated when the
carrying amount is equal to the residual value. In
such a case, the asset account and the related
accumulated depreciation account are closed, and the
residual value is set up in a separate account.
However, it is not uncommon for an entity to continue
to use an asset after it has been fully depreciated.
The cost of fully depreciated asset remaining in
service and the related accumulated depreciation
ordinarily shall not be removed from the accounts.
Entities are encouraged but not required to disclose
fully depreciated property.
Define depreciation.
Depreciation is defined as the systematic allocation
of the depreciable amount of an asset over the useful
life. Depreciation is not so much a matter of valuation.
It is a matter of cost allocation in recognition of the
exhaustion of the useful life of an item of property,
plant, and equipment. The objective of depreciation is to
have each period benefiting from the use of the asset
bear an equitable share of the asset cost.
Explain the depreciation period.
The depreciable amount of an asset shall be allocated
on a systematic basis over the useful life. Depreciation
of an asset begins when it is available for use,
meaning, when the asset is in the location and
condition necessary for the intended use by
management. Depreciation ceases when the asset is
derecognized.
What is the depreciable amount?
Depreciable amount is the cost of an asset or other
amount substituted for cost, less the residual value.
Each part of an item of property, plant and equipment
with a cost that is significant in relation to the total cost
of the item shall be depreciated separately.
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
2ND SEMESTER - REVIEWER

What is residual value?

Residual value is the estimated net amount currently

obtainable if the asset is at the end of useful life. The
residual value of an asset shall be reviewed at least
at each financial year-end and if expectation
differs from the previous estimate, the change shall
be accounted for as a change in an accounting
estimate.

What is the useful life of an asset?

The useful life of an asset is either the period over

which an asset is expected to be available for use by
the entity, or the number of production or similar units
expected to be obtained from the asset by the entity.

When is the straight-line method adopted?

Under the straight-line method, the annual depreciation

charge is calculated by allocating the depreciable
amount equally over the number of years of useful
life. It’s adopted when the principal cause of
depreciation is passage of time.

When is the production method adopted?

The production or output method assumes that

depreciation is more a function of use rather that passage
of time. It is adopted if the principal cause of depreciation
is usage.

When is the diminishing balance method

adopted?

The diminishing balance or accelerated methods provide

higher depreciation in the earlier years and lower
depreciation in the later years of the useful life of
the asset. Thus, these methods result in decreasing
depreciation charge over the useful life. This method
includes sum of years’ digits method and double declining
balance.